Mineral Rights: The Two Estates & Liquidation

Jun 17

I am fascinated by the oil, gas, and mineral economies. I am constantly monitoring the worldwide and domestic markets for any significant changes. However, I felt that I could enhance my understanding of the markets with a little bit of legal knowledge regarding oil, gas, and minerals. Because of this, I decided to do a little research on Texas oil and gas laws.

Did you know that if you are a homeowner, there is a good chance that, according to the law, you own two “separate” (though not actually separate), “estates” via your ownership of the property? These estates are known as the surface and mineral estates. The surface estate is the land where you walk and build structures, such as your home, garage, or shed. The mineral estate gives the owner the right to do a bunch of different things to the minerals under his land.

My initial thought after hearing this was, “Well, the mineral estate does not seem all that great. What am I supposed to do with a bunch of minerals under my land?” Shortly after this thought crossed my mind, I came across an enlightening article by The Mineral Auction. The article explained a process called liquidation, which is the process of selling mineral rights for compensation. In fact, I learned that liquidation is something I am particularly interested in because the amount a party receives for liquidating his minerals is largely dependent on the mineral markets.

The article went on to explain some common reasons why mineral rights owners decide to liquidate their mineral rights. For many, liquidation is a quick way to get some cash on hand. Many people liquidate their mineral rights to put money into retirement or college funds. Sometimes, after a death or divorce in the family, people are forced to liquidate their mineral rights to solve or avoid conflicts. There are several reasons why a mineral rights owner might decide to liquidate their rights, but the bottom line is that they are looking for some money.

After the article’s thorough explanation of liquidation, I thought to myself, “Wow, the mineral estate seems great!” But then I considered the possibility of moving. Suppose a homeowner decides to put their house up for sale. Further, suppose this homeowner is the owner of the mineral estate beneath his land. He is frustrated because he wants the ability to liquefy his mineral rights, but he also wants to sell his home. What can he do?

The homeowner has a simple solution called severance. This is a legal process that can separate the homeowner’s surface estate from his mineral estate. In fact, this process works both ways: the homeowner could sell his mineral estate and keep his home if he wanted. In the above example, the homeowner could sever his surface and mineral estates, sell his home, and retain the mineral estate for the future cash influx through liquidation.